Annuities can provide valuable income guarantees that help you plan for retirement. By partnering with an insurance company, you can secure a stream of payments that will last for the rest of your life or a specific number of years.
And if you're married, it's worth considering an option known as a joint and survivor annuity. Those contracts pay income for as long as either you or your spouse are alive — regardless of how long you live.
Guaranteed Lifetime Income From Annuities
When you want to secure lifetime income, an immediate annuity might be an appropriate solution. With this approach, you pay a lump sum into an annuity contract, and the insurer pays income to you monthly, annually or quarterly. Payments begin within one year (sometimes immediately after you start the annuity) and continue over whatever period you choose.
Annuities offer unique guarantees. An insurance company often promises to provide payments from the annuity for as long as you live. As a result, you don't need to worry about running out of money — even if markets crash — or managing investments yourself. Instead, the insurer is contractually obligated to pay out income, freeing you to focus on more important things in life.
You have several options when it comes to payouts from an immediate annuity. For instance, you can ask the insurer to continue payments for as long as you live (also known as a single-life annuity). While that option provides the biggest monthly or annual payments, it's not ideal for everybody.
When you use a single-life annuity, the payments stop after your death. But what if you die before your spouse? That person will still face everyday living expenses, medical bills and other costs. To ensure that your spouse continues receiving income, it might make sense to use a joint and survivor annuity.
Joint and Survivor Annuities
A joint and survivor annuity ensures that you and a spouse have income over the entire annuity period. As a simple example, you might establish a stream of income that lasts for as long as one of you continues to live (sometimes referred to as a 100% joint and survivor annuity). When the first person dies, the survivor continues to receive the same amount of income.
You can also adjust these contracts to meet your needs. For example, it could make sense to reduce the survivor's payments — which would likely result in a larger starting payment than a 100% survivor option, where the payment amount doesn't change. If the survivor only needs 50% of the payout after their spouse's death (because they'll get a life insurance death benefit, for example), that option could make sense.
Pros and Cons of Survivor Options
Every financial choice has advantages and disadvantages. With annuities, you get the largest monthly payment when you choose a single-life payout. But you also risk dying early, leaving a surviving spouse without income, and potentially getting little of your money back. Alternatively, if your spouse is the annuitant — or the person whose life is linked to the annuity — you risk losing income if your spouse dies first.
You can mitigate the risk of an early death by adding a survivorship option, but you'll end up with slightly smaller monthly payments. The reduction might be surprisingly small and well worth the tradeoff, but you'll have to review the numbers to decide. With a joint and survivor annuity, you can be confident that you'll both have ongoing income, no matter who dies first.
The Bottom Line
Annuities offer a wide range of choices for securing lifetime income. Insurance companies guarantee to continue paying for as long as the annuitant is alive, and you can add a second annuitant to protect income for both you and a spouse.
That said, there are pros and cons of joint and survivorship annuities, and there could be various ways to address the risk of a single-life annuity. For instance, your insurer might offer refund options, or you might use an annuity with a "period certain" (that pays out for the length of your life or a specific number of years). You might even use life insurance to provide a death benefit if annuity payments stop after death.
To decide what's best, speak with an insurance professional and a financial planner. Describe your situation and concerns, and ask about all available options. With a clear picture of what you're trying to accomplish, you and your insurer can design a strategy that addresses your concerns and improves your chances of success.